Contingent fees, in which clients pay lawyers only if a case is won, have long been a feature of the U.S. legal system. Many countries used to bar them, wary of importing the United States’ ambulance-chasing culture. But a belated acceptance of their benefits means they are now widely allowed.
“No-win, no-fee” arrangements help shift risks from parties to a lawsuit to their lawyers and make it less likely that a would-be plaintiff decides not to press a strong case for fear of a big financial loss.
Around a decade ago, some lawyers took the principle of risk-shifting further. They accepted money from third parties to fund cases in exchange for some of the winnings. Litigation finance has since taken off. Fortune 500 companies and New York’s elite law firms increasingly tap outside capital when pursuing multimillion-dollar suits.
Funds that invest in litigation are on the rise. In the past 18 months some 30 have launched; more than $2 billion has been raised. Last year, industry heavyweight Burford Capital put $1.3 billion into cases — more than triple the amount it deployed in 2016. Lee Drucker of Lake Whillans, a firm that funds lawsuits, said he gets calls weekly from institutional investors seeking an asset uncorrelated with the rest of the market — payouts from lawsuits bear no relation to interest-rate rises or stock market swings.
Such outside funding does not just enable plaintiffs to pursue potentially lucrative cases. It also allows law firms to hedge risk. Some clients, worried about the misaligned incentives caused by law firms’ sky-high hourly rates, insist on partial or full contingency-payment schemes. Outside funding lets firms recoup some revenue even if they do not win a case.
“Firms that lose are still going to take a bath,” said Nicholas Kajon of Stevens & Lee. “But the write-off won’t be quite as bad.”
Returns are usually a multiple of the investment or a percentage of the settlement, or some combination of the two. Funders of a winning suit can expect to double, triple or quadruple their money. Cases that are up for appeal, where the time span is short — usually 18 to 24 months — and the chance of a loss slimmer, offer lower returns. New cases that are expected to take years offer higher potential payouts.
A maturing market means more sophisticated offerings. To spread risk, funders are bundling cases into portfolios and taking a share of the proceeds. Last year Burford plowed $726 million into portfolio deals, compared with $72 million into stand-alone suits.